Northeast sees hikes in heating oil demand, prices

Published: January 30, 2014

The severely cold temperatures entrenched over a broad swath of the United States in recent weeks are affecting numerous energy markets, including the heating oil market in the Northeast. As temperatures have dropped, prices for heating oil in the Northeast have risen, with spot prices for heating oil in New York Harbor on January 28 at $3.17 per gallon (gal), 17 cents/gal higher than at the beginning of 2014.

Demand for heating oil has outpaced supply during January's cold snaps, resulting in a drawdown of stocks. The EIA estimate for distillate consumption (a category which includes heating oil) for the United States has risen sharply over the past three weeks, averaging 4.0 million barrels per day (bbl/d) for the three weeks ending January 24, an increase of 500,000 bbl/d from the three weeks ending January 3. In addition to increased demand from consumers that regularly use oil heat, press reports indicate that some commercial, industrial, and electricity generating customers that typically burn natural gas delivered under less-expensive non-firm contracts are turning to oil because their natural gas suppliers have exercised their interruption rights in order to serve customers with firm contracts. Interruptible customers often use heating oil or residual fuel oil as a backup fuel for space heating. This fuel switching is creating incremental demand for heating oil.

EIA estimates petroleum product consumption in the United States each week. Roughly 80% of homes heated primarily with oil are located in the Northeast ((PADD 1A and 1B). Distillate inventories in the Northeast have fallen 4.8 million bbl (19%) in the past three weeks (ending January 24), much faster than the 2.1-million-bbl draw typically seen during this time (Figure 2). The region's distillate inventories are now 20.0 million bbl (50%) below the five-year average. EIA estimates that as of January 24, the Northeast had 22 days of demand cover in inventory, about 47% less than typical during January.

The recent tightness in the heating oil market is evidenced by increasing backwardation in the heating oil futures curve. As of January 28, prompt heating oil contracts for February delivery were trading 13 cents/gal above contracts for March delivery, a sharp increase from January 2, when that spread was just 1 cent. This steep backwardation indicates a strong incentive to sell supplies out of inventory into the prompt market. Additionally, spot prices farther north along the Atlantic coast are higher than the $3.17/gal in New York Harbor. On January 28, Boston spot prices stood at $3.21/gal, and prices in Portland, Maine, were reported to be even higher.

Distillate spot prices in the U.S. Northeast have also moved higher than spot prices in northwestern Europe. Typically, distillate prices in Europe are higher than U.S. prices because during times of normal demand, Europe is structurally short of distillate fuel. As of January 28, New York Harbor spot prices were 21 cents/gal above prices in Europe's Amsterdam Rotterdam Antwerp (ARA) hub, after averaging 8 cents/gal under ARA prices for all of 2013. While the United States has experienced colder-than-normal temperatures in January, temperatures in Europe have generally been warmer-than-normal.

This shift in trans-Atlantic pricing has encouraged refiners in Europe, and as far away as India, to export distillate fuel to the United States. When these shipments arrive they could help to temper U.S. prices by adding supply to the Northeast market. Trade press reports that there are up to 6.6 million bbl of distillate fuel coming to the United States, scheduled for delivery in February. Most of these ships are coming from Russia.

Gasoline price flat while diesel fuel price increased
The U.S. average retail price of regular gasoline decreased less than one cent to remain at $3.30 per gallon as of January 27, 2014, six cents lower than last year at this time. Prices increased by two cents in the Midwest to $3.22 per gallon and decreased one cent in all other regions of the nation. The Gulf Coast price was $3.09 per gallon, the Rocky Mountain price fell to $3.13 per gallon, the East Coast price was $3.38 per gallon, and the West Coast price was $3.49 per gallon.

The national average diesel fuel price was up three cents to $3.90 per gallon, two cents lower than last year at this time. Prices increased in all regions of the nation. The largest increase occurred on the East Coast where the price rose five cents to $4.00 per gallon. The Midwest price increased four cents to $3.87 per gallon and the West Coast price was $3.98 per gallon, up one cent from last week. Both the Gulf Coast and Rocky Mountain prices were up a fraction of a penny to remain at $3.77 per gallon and $3.86 per gallon, respectively.

Propane inventories fall
U.S. propane stocks fell by 3.6 million barrels to end at 31.7 million barrels last week, 25.8 million barrels (44.9%) lower than a year ago. Midwest and Gulf Coast inventories both decreased by 1.4 million barrels. East Coast inventories dropped by 0.6 million barrels and Rocky Mountain/West Coast inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 11.7% of total propane inventories.

Residential propane price surges while heating oil price also increases
Residential heating oil prices increased 12 cents per gallon to reach a price of nearly $4.18 per gallon during the period ending January 27, 2014. This is 13 cents per gallon higher than last year's price at this time. Wholesale heating oil prices increased by more than 18 cents per gallon last week to $3.39 per gallon.

The average residential propane price jumped by $1.05 per gallon last week to $4.01 per gallon, almost $1.72 per gallon higher than the same period last year. This is the largest single weekly increase since the survey began in 1990. Ten states (all located in the Midwest) in the residential propane survey had price increases of 97 cents per gallon or more during the week ending January 27, 2014. Wholesale propane prices increased by $1.43 per gallon to nearly $3.55 per gallon as of January 27, 2014.